Duman \ OBLICON \ Prof Morales \ I-E \ Page 1
Digests for Defective Contracts
Rescissible Contracts
Universal Food Corp Vs. CA
Facts:
• This is a petition for certiorari by UFC against the
decision of the CA whereby CA ordered UFC to return
to plaintiff Magdalo Francisco his Mafran sauce
trademark and formula and to pay his monthly salary
of P300 per month.
• In 1960 plaintiff and def corp entered into a contract
where it was stipulated that Francisco is the owner
and the author of the formula of the mafran sauce
and he will be appointed Second VP and Chief
Chemist. That he will have absolute control and
supervision over the lab assistants and personnel.
• In return, plaintiff assigned to corp his interests and
rights over the said trademark and formula so that
the def corp could use the formula in the preparation
and manufacture of the mafran sauce and the trade
name fro the marketing as shown in a contract
entitled “Bill of Assignment”.
• Def without any justifiable cause dismissed all the
assistants and laborers of plaintiff with evident
intention to discover the formula and were not able to
do so, dismissed the plaintiff as chief chemist and
appointer other employees in his place in the
preparation of said sauce.
• Def corp also deprived him of his right to the royalty
equivalent to 2% of the net profit of the corp. (He has
registered his trademark in the Bureau of Patents in
1938).
• Def Corp thru its President Tirso Reyes, is selling in
favor or a third party the assets of the said corp
together with the ownership of the aforementioned
trademark and formula in violation of the contract.
• Def defenses are that they have complied with the
terms of the contract and that Francisco was not
dismissed and that he was even given several
memoranda that he reports to work but he failed to
do so, thus, he is the one who has failed to comply
with the stipulations of the contract.
• It was Francisco who filed for rescission of the
contract.
Issues:
1) WON the Bill of Assignment ceded and transferred to UFC
the formula of Mafran sauce.
2) WON Franciso was dismissed from the corporation without
justifiable cause and in violation of the stipulations in the Bill of
Assignment which states that his appointment is permanent in
character
3) WON the rescission of the Bill of Assignment should be
granted.
Held:
1) No. It was only the use of the sauce and not the
formula which was the intention of the parties.
a) Payment of royalty: royalty when used in connection
with a license under a patent, menas the
compensation paid by the licensee to the licensor for
the use of the licensor’s patented invention.
b) It was clear that plaintiff wanted to preserve the
secrecy of the Mafran formula and to prevent its
unauthorized proliferation, it is provided in the
contract that he will be chief chemist and that he shall
exercise absolute control and supervision from
personnel to the preparation of the said product. No
other persons were allowed to enter the laboratory
even his sons or the President of the corp.
c) Civil Code—conveyance should be interpreted to effect
the “least transmission of right” and there is a better
example of least transmission by allowing or
permitting only the use, without transfer of
ownership, of the formula of the mafran sauce.
2) Yes. UFC issued a memorandum directing that only
Ricardo Francisco (another Francisco in the case who
was the assistant chief chemist) be retained and that
the salary or Magdalo Franciso be stopped until the
corp resume operations and their reason was bec of
the scarcity and high prices of raw materials but 5
days after this memorandum, they filed several
memoranda directing plaintiff to report to work and
produce sauc of not less than 100 cases a day, to hire
personnel, and to produce what is being demanded.
Clearly it was the corp’s way of maneuvering to ease
out, separate and dismiss plaintiff.
3) Yes. 1191 vs. 1383 and 1384.
• General rule ios that rescission of a contract will not
be permitted for a slight causal breach but only for
such substantial and fundamental breach as would
defeat the very object of the parties in making the
agreement. (Corp is alleging the rescission is only
subsidiary remedy and should be instituted if there
are no other means)
• The dismissal of Francisco is fundamental and
substantial. Apart from the legal legal principle that
the option for rescission belongs to the injured party,
the fact remains that there is no alternative but to file
the present action.
• The corp is alleging that plaintiff cannot have both,
rescission and the performance of an obligation i.e.
payment of salary. Court held that the use, the right
to use, and the formula for the sauce remained in the
corp when plaintiff was dismissed.
• Bill of Assignment rescinded and corp ordered to
retrun and restore the right to the use of his mafran
sauce trademark and formula, corp enjoined from
using the mafran trademark and formula and to pay
the salary from 1960 until date of inality of judgment.
Note: Discussed the reconciliation of rescission articles.
Guzman, Bocaling & Co. vs. Bonnevie
Facts:
• A 600 sqm parcel of land with two buildings belonging
to the Intestate Estate of Jose Reynoso was leased to
Raoul and Christopher Bonnevie by the administratix
Africa Valdez for a period of one year at a rate of 4K a
month starting Aug. 1976.
• In the contract of lease, there is a stipulation that “in
case the lessor desires or decides to sell the leased
property, the lessees shall be given a first priority to
purchase the same, all things and considerations
being equal.
• In Nov. 1976, administratix notified the resp by
registered mail that she is selling the premises for
600K less a mortgage loan and giving them 30 days
from receipt to exercise their right of first priority. If
they would not exercise, she expects them to vacate
the prop in March 1977.

• In Jan 1977, she sent a letter notifying them that in
their failure to exercise their right, she has already
sold the property. This is the only letter that the
Bonnevies received. They informed agent that they
are willing to make negotiations and that they refuse
the termination of the lease.
• In March 1977, property formally sold to Guzman,
Bocaling & Corp for 400K and the balance of this
amount shall be paid when the Bonnevies have
already vacated the premises.
• Administratix demanded that they vacate the
premises and pay the rentals for four months.
• They had a Compromise Agreement that the
Bonnevies shall vacate the premises not later than
Oct. 1979 but this was set aside.
• The Bonnevies filed an action for annulment of the
sale between REynoso and the GBC and ancellation of
the transfer certificate. They also asked that Reynoso
be required to sell the property to them under the
same terms and conditions agreed upon the Contract
of sale.
Issue:
WON the Bonnevies can file for an action for annulment of the
sale between Reynoso and the GBC considering that they are
third parties to the contract.
Held:
Yes. The Contract of Sale was not voidable but rescissible.
• Under Art 1380 to 1381 (3) of the CC, a contract
otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial
interest that were prejudiced by the sale of the
subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.
• Tolentino: rescission is a remdy granted by law to the
contracting parties and even to third persons, to
secure reparation for damages caused to them by a
contract, even if this should be valid, by means of the
resotoration of things to their condition at the
moment prior to the celebration of said contract.
• It is a relief allowed for the protection of one of the
contracting parties and even third persons from all
injury and damage the contract may cause, or to
protect some incompatible and preferred right created
by the contract.
• Rescission implies a contract which, even if initially
valid, produces a lesion or pecuniary damage to
someone that justifies its invalidation for reasons of
equity.
• GBC cannot be buyers in good faith bec they had
knowledge of the lease of the premise. They were
negligent in not inquiring about the terms of the
Lease Contract.
Voidable Contracts
Uy Soo Lim vs. Tan Unchuan
Facts:
• An action for annulment of a contract by terms of
which Uy Soo Lim sold to Pastrano all his interesit in
the estate of the late Santiago Pastrano Uy Toco.
• When Santiago was 13, he came from China to reside
in the Phil.
• In Aug 1882 he married Candida Vivares at Cagayan
de Misames. They had 2 daughters Francisca nad
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Concepcion. Francisca is a defendant in this suit and
the wife of the co-def Tan Unchuan.
• He had little property before, but during his marriage
with Candida, he has acquired larger properties.
• Santiago returned to China after one year and entered
into an illicit relationship with Chan Quieg.
• He returned to the Phil and never saw Chan Quieg
again but then he received a letter from her saying
that she had borne him a son Uy Soo Lim.
• Santiago died without even seeing his son and with
the belief that he is his only son, he dictated the
provisions of his will upon this belief disposing a
greater part of his properties to his son.
• In 1901, Santiago died with persons who survived
him, Candida Vivares and daughters and Chan Quieg
and Uy Soo Lim.
• Tan Chuan was named executor and Uy Bundan, the
brother of Sanitago was named testator guardian of
Francisca, Concepcion and Uy Soo Lim.
• Until Oct 1910, Uy Bundan continued administering
the properties and on Oct 18, 1910, Francisca had
reached majority, Concepcion would reach majority in
a few months and Uy Soo Lim had married, the
guardian was ordered to present a plan of distribution
of the estate accdg to the dispositions of Santiago’s
will. He did not comply.
• Candida claims the right as widow and claims for ½ of
the estate and asked that administration of the estate
be reopened.
• Francisca and Concepcion filed that Uy Soo Lim was
not entitled under law to the amount assigned to him
for the reason that the marriage of Chan Quieg with
Santiago was null and void and that Uy Soo Lim was
not a son of Santiago, either legitimate or illegitimate.
• Chan Quieg claims for ½ of the properties bec she
claims that she has lived martially with Santiago and
that their union was valid under the laws and customs
of China.
• Uy Soo Lim appointed Choa Tek Hee as agent and
adviser and executed a power of attorney in favor of
Tek Hee to represent him in the pending negotiations.
• There was an agreement reached that they would
submit the dispute to there respectable Chinese
mechants as friendly advisers.
• In 1911, Uy Soo Lim executed a deed which
relinquished and sold to Francisca all his right, title
and interest in the estate in consideration of P82,500.
Concepcion and Candida Vivares relinquished and sold
also to Francisca all their right, title and interest.
Chan Quieg also sold and relinquished to Francisca all
her right, title and interest. She also gave her consent
to the sale of Uy Soo Lim of his right and interest (Uy
Soo Lim was still a minor).
• Francisca was declared as sole owner of all properties
of Santiago.
• In 1914, Uy Soo Lim seek to rescind and annul the
contract by which he has sold and transferred to
Francisca his interest in the estate.
• He alleges that undue influence was exercised upon
him, taking advantage of his youth. The court
discounted this allegations because there has been no
evidence to prove such claim (he was even a student
of law and the court said he was a youth of more than
ordinary intelligence—wow tayo rin?). Furthermore,
he had the benefit of the advice of two lawyers.
Issue:
WON Uy Soo Lim can file for the annulment of the contract.
Held: No.

• Although the RTC found that he was a minor at the
time of the eexecution of the contract, but that he did
not only fail to repudiate it promptly upon reaching
his majority but tacitly ratified it by disposing of the
greater part of the proceeds after he became of age
and after he had full knowledge of the facts upon
which he now seeks to disaffirm.
• In 1913, he has already reached his majority under
the Phil law (21 yrs old). He had received P20K before
majority and the P62.5K after majority. He has spent
for his own use the money he has received.
• Knowing his legal rights, plaintiff should have been
prompt to disaffirm his contract upon reaching
majority. Instead, he deliberately permitted the
defendants to continue making the payments and
when the last cent was collected, sought to avail
himself of this ground for rescission.
• Old Code: Rescission obliges the return of the things
which were the objects of the contract with their fruits
and the sum with interest; therefore it can only be
carried into effect when the person who may have
claimed it CAN return that which on his part he is
bound to do (1295).
• 1304: When the nullity arises from the incapacity of
one of the contracting parties, the incapacitated
person is not obliged to make restitution, except to
the extent he has profited by the thing or by the sum
he may have received.
Note: The important fact is not the time when he received the
money, but the time he disposed of it. If it be shown that he
has the power to restore the thing that he received, he cannot
be allowed to rescind without first making restitution.
Sps. Theis vs CA
Facts:
• Calsons Devt Corp is owner of 3 adjacent parcels of
land covered by TCT in Tagaytay.
• In 1985, private resp (CDC) constructed a two-storey
house son parcel no. 3 while parcels 1 and 2 remained
idle.
• However in a surver in 1985, parcel no. 3 where the
2-storey house stands was erroneously indicated to be
covered by a different TCT while the two idle lands
were mistakenly surveyed to be located on parcel no.
4 and covered by a different title as well.
• In 1987, unaware of the mistake by which priv resp
appeared to be the owner of the parcel no. 4 as
indicated in the erroneous survey, the priv resp thru
its legal rep sold parcel no.4 to petitioners.
• Petitioners did not immediately occupy and take
possession of the two parcels. They went to Germany.
• When they went back, they discovered that no. 4 was
owned by another person. And they discovered that
what was actually sold to them were parcels no. 2 and
3. However, no. 3 could have not been sold to pet
since the two-storey house was erected on each and
the construction of said house far exceeded the price
paid by the petitioners.
• Pet insisted that it was parcel no. that they bought
but priv resp could not have possibly sold parcel no. 4
since they don’t own the lot.
• There is a mistake of the identity of the said lots
which is traceable to the erroneous survey conducted
in 1985.
• To remedy this, priv resp offered parcels 1 and 2 as
these two were precisely the two vacant lots which
they owned and intended to sell when they entered
into the contract.
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• Pet refused and instead on taking no. 3 where the
house stands and no. 2 on the ground that the TCTs
of these lots have already been cancelled and new
ones were issued in their name.
• Such refusal prompted that priv resp to make another
offer—the return of an amount double the price paid
by pet but pet still stubbornly refused to accept the
offer.
• Priv resp was then compelled to file an action for the
annulment of the deed of sale and the reconveyance
of the propertoes.
Issue:
WON the contract can be voided on the ground of mistake (as
what the lower court ruled).
Held:
Yes.
• On the facts of the case, it was clear that what the pet
wanted to buy were the vacant lots and not the lot
with the house on it and it was also clear that what
the priv resp intended to sell were the vacant lots and
not the land with the house on it.
• The law explicitly recognized that consent of the
parties is one of the essential elements to the validity
of the contract and where consent is given through
mistake, the validity of the contractual relations
between the parties is legally impaired.
• The mistake or error on the subject of the sale in
question appears to be substantial as the object of the
same transaction is different from that intended by
the parties. This fiasco could have been cured and the
pain and travails of this litigation avoided, had parties
agreed to a REFORMATION of the deed of sale. But as
shown bu the sequence of events occurring after the
sale was consummated, and the mistake was
discovered, the defendants refused, insisting that they
wanted the vacant lot on the right side of the
plaintiff’s house which was impossible for plaintiff to
do, as said vacant lots were not of its own dominion.
• There was an honest mistake on the part of the
plaintiff-appellee in the sale of Parcel no. 4 which they
tried to remedy.
• 1390 of the New CC: The ff contracts are voidable or
annullable even thought there may have been no
damage to the contracting parties xxx those where
the consent is vitiated by MISTAKE, violence,
intimidation, undue influence or fraud.
• Tolentino explains that the concept of error in this
article must include both ignorance, which is the
absence of knowledge with respect to a thing and
mistake properly speaking, which is a wrong
conception about said thing, or a belief in the
existence of some circumstances, fact, or even, which
in reality does not exist. In both cases, there is a lack
of full and correct knowledge about the thing.
Rural Bank of Caloocan Inc. vs CA
Facts:
• In Dec 1959, Maxima Castro and Severino Valencia
went to the Rural Bank of Caloocan to apply for an
industrial loan. It was Valencia who arranged
everything about the loan with the ban nd who
supplied to the latter the personal data required for
Castro’s loan application.

• The bank approved the P3K loan and on this loan was
executed a real-estate mortgage on Castro’s house
and lot.
• In 1961, the sheriff of Manila sent a notice to Castro
that her property would be sold at public auction on
March 1961 to satisfy the obligation covering the two
prom notes.
• It was moved to April 10, 1961 but it was declared a
special holiday and so the prop was sold on April 11,
1961.
• Castro alleged that it was only on Feb. 13, 1961 that
she learned for the first time that the mortgage
contract was for 6K and not for 3K and that she was
made to sign as co-maker in the prom note without
informing her about this.
• She filed a suit against the Bank and spouses Valencia
that thru mistake on her part or fraud, she was
induced to sign as co-maker of the prom note. At the
time of filing of the complaint, she consign the
amount of P3.3K for full payment of her personal loan
with interest.
• Her house was sold at a public auction and the bank
executed a deed of sale to Arsenio Reyes for P7K.
• She claims that she is a 70-year old widow who
cannot read and write the English language and that
she only finished 2nd grade. She was just asked to sign
papers with no one explaining to her the nature and
contents of the documents and that she didn’t even
receive a copy of these documents.
Issue:
WON the promissory note was invalid because the mortgage
contract was valid up to P3K only.
Held:
No. The prom notes cannot be declared valid between the Bank
and Castro and the mortgage contract binding on Castro
beyond the amount of P3K.
• For while the contracts may not be invalidated insofar
as they affect the bank and Castro on the ground of
fraud because the bank was not a participant thereto,
such may however, be invalidated on the ground of
substantial mistake mutually committed by them as a
consequence of the fraud and misrepresentation by
Valencias.
• Both Castro and the bank committed mistake in giving
their consents. Substantial mistake vitiated their
consents given. 1342: Misrepresentation by a third
person does not vitiate consent unless such
misrepresentation has created substantial mistake
and the same is mutual. The bank and Castro were
negligent in giving their consent to the contracts.
• A contract may be annulled on the ground of vitiated
consent if deceit by third person even without the
connivance of complicity with one of the contracting
parties, resulted in mutual error on the part of the
parties to the contract.
• Bank and Valencia were held liable and Reyes’ petition
for rent from Castro was denied and was put on
abeyance until resolution of the case is finalized.
MWSS vs CA and MWSS vs. Lopez
Facts:
• in 1965 MWSS (Nawasa then) leased around 128
hectares of its land to CHGCCI (international Sports
Development Corp) for 25 yrs renewable for another
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15 years until 2005 with a stipulation allowing the
latter to exercise a right of first refusal should it be
open for sale.
• LOI (letter of instruction) was issued by Pres. Marcos
directing MWSS to cancel the Chgcci lease agreement
for the disposition of the property. In 1981, MWSS
and chgcci agreed in principle the purchase of the
property. Marcos expreesed his approval of the sale.
• MWSS then approved the sale of the prop in favor of
Silhouette, as an assignee of chgcci for 25M.
• Silhouette entered a deed of sale with AYALA for 74M,
the P25M was to be paid by Ayala to MWSS in July
1984.
• Ayala developed the land and is now know as the
Ayala Heights Subdivision.
• In March 1993 (almost 10 yrs after), MWSS filed an
action against herein resps seeking for the declaration
of nullity of the MWSS-Silhouette sales agreement.
Reason is because of fraudulent and illegal acts of the
defendants and that the contract was influenced by
Marcos where the land was sold at P40/sqm despite
full knowledge that prop’s value is much much higher.
• Ayala filed the affirmative defenses of prescription,
laches, waiver, estoppel, ratification, no cause of
action, non-joinder of indispensable parties, and non-
jurisdiction of the court for the non-specification of
amount of damages sought.
Issue: WON the sale can be declared null and void.
Held. NO. All of the elements of a contract are present. Taking
such allegation as hypothetically true, the alleged vitiation of
MWSS consent, it would only render the sale voidable and not
void ab initio.
• As the contract were voidable at the most, the 4-year
prescriptive period under 1391 will apply.
• Hypothetically admitting that President Marcos unduly
influenced the sale, the prescriptive period to annul
the same would have begun on Feb. 26, 1986 which
this Court takes judicial notice of as the date Marcos
was deposed (if thru undue influence).
• However, if MWSS’ consent was vitiated thru fraud,
the prescriptive period would commenced upon the
discovery. Discovery commenced from the date of the
execution of the sale of documents as petitioner was
party thereto. At the least, discovery is deemed to
have taken place on the date of registration of the
deeds with the Register of Deeds as registration is
constructive notice to the world. Thus it would
commence in 1984 when the agreements were
registered and titles were issued. At the latest, the
action would prescribe by 1988. MWSS claims that
contract is void ab initio bec the initial agreement
from which these agreements emanated was executed
without the knowledge much less the approval of
petitioner MWSS. However the Court held that this
agreement is not a sale.
• On laches: The prevailing doctrine is that the right to
have a contract declared void ab initio may be barred
by laches although not barred by prescription.
• Elements of laches are all present:
a. conduct on the part of the defendant, or one under
whom he claims, giving rise to the situation that led
to the complaint and for which the complaint seeks a
remedy.
b. Delay in asserting the complainant’s rights, having
had the knowledge or notice of the defendant’s
conduct and having been afforded an opportunity to
institute a suit
 Duman \ OBLICON \ Prof Morales \ I-E \ Page 5
c. Lack of knowledge or notice on the part of the such authority or consent, the disposition or
defendant that the complainant would assert the right encumbrance shall be void.
on which he bases his suit and • The fact remains that such contract was entered into
d. Injury or prejudice to the defendant in the event relief without the wife’s consent. The nullity of the contract
is accorded to the complainant or the suit is not held of sale is premised on the absence of private resp’s
barred. consent.
• On ratification: Ratification can be made by the
corporate board either expressly or impliedly. Implied
ratification may take various forms like silence or
acquiescence by acts showing approval or adoption of
the contact or by acceptance and retention of benefits
flowing therefrom. Both have been made in this case.
• On non-joinder: the lot owners should have been
included in the suit as parties-defendants because
they are indispensable parties without whom no relief
is available and without whom the court can render no
valid judgment.

Spouses Guiang vs. CA

Facts:

• Gilda Corpuz filed an Amended Complaint against her

husband Judie Corpuz and the spouses Guiang. In the
complaint, she sought the declaration of a certain
deed of sale which involved the conjugal property of
private resp and her husband null and void.
• The husband sold to the spouses one-half of the
conjugal property consisting of their residence and the
lot on which it stood. Gilda left for Manila in 1989 to
look for work abroad but unfortunately she became a
victim of an unscrupulous illegal recruiter.
• In 1990, Harriet, one of her daughters wrote to her
mom telling her about the sale of their home lot.
Mother replied that she was objecting to the sale.
• However in the absence of his wife Gilda, Judie
pushed thru the sale of the remaining one-half of the
property.
• When she came back from the Middle East, she found
her children staying with other households.
• Gilda stayed in their house with one her children,
thus, made the spouses Guiang complained at the
Barangay for trespassing. They have agreed to have
an amicable settlement but she then complained to
the Brgy. Captain who testified that he did not deny
that Gilda approached him only that he forgot that
Gilda approached him. Thus the conclusion that Gilda
did approached the Brgy. Captain for the annulment of
the settlement.
• The Lower Court ruled that the alienation or
encumbrance by the husband of the conjugal property
without the consent of his wife is null and void as
provided in the Family Code (124). Ratification by the
amicable settlement is barred bec it is specifically
provided that his is prohibited or declared void by law.

Issue:

WON the contract was merely voidable and was later ratified
by the amicable settlement.

Held:

No. In this case, private resp’s consent is totally inexistent of

absent, thus would not fall under par 2 of 1390 (vitiated
consent).

• Art 124 also states that” xxx these powers do not

include the powers of disposition or encumbrance
which must have the authority of the court or the
written consent of the other spouse. In the absence of